Banking Act and related Laws and Regulations

(1) Banking Act

The Banking Act (formulated in 1927, then thoroughly revised in 1981) comprises a total of ten chapters which stipulate regulations relating to the scope of banking business and ensuring the soundness of banks (capital adequacy requirements and limits to restrict bank exposures to single borrowers) and regulate accounting (including disclosure provisions), supervision of banks, and so forth. The regulations divide the scope of banking business into six main categories: 1) typical banking businesses, 2) ancillary businesses, 3) securities businesses, 4) insurance businesses, 5) peripheral businesses, and 6) trust businesses. The key activities for each category are as shown below. The Act also stipulates that banking business may be carried out by means of bank agents.

In addition, as regulations relating to ensuring the soundness of banks, the Act stipulates provisions concerning capital adequacy requirements and limits to restrict bank exposures to single borrowers based on Basel III. Specifically, the capital adequacy regulations require banks that possess overseas offices (i.e., banks subject to international standards) to comply with a minimum requirement for capital adequacy ratio based on Basel III and requires banks that do not possess overseas offices (i.e., banks subject to domestic standards) to meet a capital adequacy ratio calculated by domestic standards based on Basel III. Meanwhile, limits to restrict bank exposures to single borrowers require that the amount of credit provided by a bank (or banking group) to one individual (entire group) does not exceed the amount obtained when the bank’s equity capital amount is multiplied by a fixed ratio (the credit provision limit amount).

(2) Bank Supervision and Inspection

In Japan, the Financial Services Agency (FSA) serves as a regulatory authority of financial institutions based on the Banking Act. Banks are corporations that have been established in accordance with the Commercial Code (presently, the Companies Act) and have obtained a license to conduct banking business in accordance with the Banking Act. The Banking Act empowers the Commissioner of the FSA to request reports and materials concerning the business or financial conditions of a bank (including its agencies), to conduct on-site inspections at bank premises, to penalize misconduct (suspension of a bank's operations or revocation of its license) and to order a bank to hold a part of its assets within Japan. The Banking Act delegates detailed provisions necessary for its enforcement to cabinet/ministerial ordinances from administrative bodies. In order to provide interpretations of laws and ordinances related to financial institutions and guidance/standards for their application in actual business, guidelines and supervision policies have been issued. Since 2007, the FSA has advocated the initiative of “better regulation.” This initiative is based on the view that enhancing the attractiveness and competitiveness of Japan’s financial and capital markets and enabling financial firms to provide high-quality financial services to meet user’s needs are major challenges for Japan’s economy and society. To this end, it is vital to improve the business and regulatory environment for both users and providers of financial services. “Better regulation” is one of the initiatives incorporated in the Plan for Strengthening the Competitiveness of Japan's Financial and Capital Markets, which was published by the FSA in December 2007. The FSA supports the concept of the “optimal combination of rules-based and principles-based supervisory approaches,” as one of the pillars of the “better regulation” initiative, and subsequently published “The Principles in the Financial Services Industry” in 2008. On the other hand, the Bank of Japan (BOJ) is not a regulatory authority per se under the Banking Act, but it conducts on-site examinations in order to maintain a safe and sound financial system. These examinations are based on bilateral agreements between the BOJ and financial institutions that have current accounts with it under the Bank of Japan Act. In practice, this includes all city banks, regional banks, regional banks II and trust banks as well as foreign banks in Japan, shinkin banks, securities firms and money market dealers. The BOJ also conducts examinations of banks' overseas branches.

FSA Guidelines

Guidelines

Outlines

Principles

The Principles are a set of key codes of conduct or general behavioral rules that are the underlying basis for statutory rules such as laws and regulations, and should be respected when financial firms conduct their business as well as when the FSA takes regulatory actions.

Inspection Manual

The Inspection Manuals were formulated as handbooks to be used by FSA inspectors when they inspect financial institutions. They emphasize self-assessment and risk management by financial institutions.

(3) Other Principal Laws Concerning Banking

Banks are subject to various laws in addition to their primary law, the Banking Act. Other principal laws concerning banks are described below.

Other Principal Laws

The Antimonopoly Act

This Act stipulates that banks or other companies engaged in financial business may not acquire or hold more than 5% of voting right of all shareholders in another company in Japan. However, in cases where the Japan Fair Trade Commission, based on its guidelines, deems that holding more than 5% of voting right will not impede fair competition, banks may apply in advance for approval to be treated as an exception, and the Act also recognizes that banks may hold 5% or more of voting right in a financial company without any restrictions.

The Act on Limitation on Shareholding by Banks and Other Financial Institutions

Enacted in 2001, this Act restricted the shares that may be owned by a bank to an amount equivalent to its equity capital (Tier 1), in order to reduce market risks related to shareholding by banks. Banks were required to reduce the shares they owned by the end of September 2006. Also, based on this Act, the Banks' Shareholdings Purchase Corporation which purchase bank shareholdings out of the market was established in order to avoid a negative impact on the stock market by selling of bank shareholdings.

The Deposit Insurance Act

The Deposit Insurance Act stipulates provisions relating to the protection of deposits in the event of a bank’s failure. It protects the full amount of “deposits for payment and settlement purposes” (checking accounts, savings accounts with no interest, etc.) that meet three conditions (the deposits bear no interest.; the deposits are repayable to their depositors on demand; and the deposits can be used for a settlement services). In addition, for other deposits (mainly fixed-term deposits), principal of up to a maximum of \10 million in principal plus related interest thereon per depositor per financial institution, is protected. Besides deposit insurance, the Act also stipulates measures relating to the resolution of failed financial institutions, responses to financial crises, measures for orderly resolution of assets and liabilities of financial institutions for ensuring financial system stability, etc.

The Financial Instruments and Exchange Act

This Act stipulates comprehensive user protection, the disclosure system, the self-regulatory functions of exchanges, and handling of improper transactions with respect to investment-type financial products. Sales and solicitation rules for the purpose of protecting users have been developed for all financial products, and the user protection regulations extend even to structured deposits which incorporate foreign currency deposits and derivatives, variable insurance, and so forth are not directly covered by the regulations in this Act. A Financial ADR System has been established with the aim of resolving disputes with financial institutions without resorting to litigation. The dispute resolution organizations that financial institutions are obliged to use under this system are designated and supervised by governmental authorities, who ensure their neutrality and impartiality.

The Act on Prevention of Transfer of Criminal Proceeds

This Act is intended to prevent money laundering and terrorist financing as well as make it possible to trace illicit funds in the event that they are transferred. It requires financial institutions to verify customer identity at the time of a transaction and to report suspicious transactions. Based on this Act, banks are required to verify a customer’s identity at the time of the transaction by having them present ID when opening a new account or executing a large transfer (domestic and international transfers exceeding ¥100,000) etc, and report any suspicious transactions to the authorities if they suspect that assets received from customers may be criminal proceeds.

This Act stipulates regulations based on the increased frequency of incidents involving counterfeit or stolen cash cards issued by private financial institutions and postal bank that handle deposits. In cases where a cash card is counterfeited or stolen by someone and deposited funds are fraudulently withdrawn from an ATM, the financial institution is obliged to provide compensation for the damages suffered by the depositor.